Foreclosures can save you money … not always a fortune
For the past several months, interest rates for home mortgages have steadily risen. This factor has caused a ripple effect on the housing market.
“1. People who once were able to afford to purchase a home are pushed out of the equation because they simply cannot afford mortgage payments at the current rate.
“2. Those who got in on the housing boom with a variable-rate mortgage when interest rates were low are now seeing their mortgage payments climb with every increase. They could now be facing foreclosure due to an inability to pay.
“3. Homeowners whose houses are on the market are not getting the top dollar they once could when interest rates were low. As a result, many homes are sitting on the market much longer than expected.
Despite the ups and downs of the real-estate market, there will always be people who dream about owning their own home. For those who have sought the help of a real-estate agent, given their desired price range and housing needs, and have been told there’s nothing they can afford, purchasing a foreclosure property may be the way to go.
As mentioned in point No. 2, variable-rate mortgages are putting many current homeowners who opted for this financing scenario into hot water. A variable-rate mortgage is one on which the interest rate charged by the lender may be adjusted in accordance with a stipulated cost-of-funds index. Simply put, as the Fed increases the interest rate, variable rates go up in response. Homeowners who once may have been easily making their mortgage payments could be coming up short now that rates have risen. This is making foreclosures more prevalent in towns across the country.
Foreclosures Take Work
Foreclosures are a viable option for those looking to save a bit of money on a home purchase. However, they’re not for the weak of heart. Typically, purchasing a foreclosure property requires a good deal of perseverance, research and legwork. First, you must determine how you want to proceed with a foreclosure. There are generally three categories within the broad foreclosure market process:
“Pre-foreclosure properties: These are homes where the owners have fallen behind on payments. The litigation process may have begun (dependent upon the legalities of each state) and the homeowner typically has been notified that they are in default of their loan. Pre-foreclosure properties may earn you the greatest purchase discount if you contact the current owner and negotiate a price, since many homeowners do not want a foreclosure on their credit history. However, this option is not without risk. Many homeowners who are in foreclosure have been so for several months to a year. They may have fallen behind on much-needed repairs and even taxes on the property. You could be walking into a home that has major damage or liens against it. While you could be saving on the purchase price, liens — typically placed on a home for failure to pay property taxes — can be exorbitant. Also, you also run the risk of dealing with a person who may purposefully damage the property after agreement to sell. There are desperate or irate homeowners who lash out when faced with foreclosure.
“Auctions: Auctions may take place on the steps of the county courthouse. While there could be the promise of a steal, potential buyers are often bidding sight unseen on a property and do not have the chance to inspect the home. What’s more, some courts require payment in full at the time of bidding. So you’ll need to have financing secured in advance and show up with a cashier’s check. In addition, in the frenzy of the auction, some homes are bid up and the buyer comes away with a home that is only a few-percent cheaper than the going price.
“Bank-owned: Deemed the most secure option when purchasing foreclosures according to financial experts, they may also garner the least savings. These real-estate owned (REO) homes are safe because there are no liens against the property (the lender clears the title and sometimes even takes care of repair work), no tenants to evict, and you can usually view and inspect the property yourself. However, lenders are in the business of making money, so some have entire departments devoted to marketing and selling REOs. They may hire a real-estate agent and list the home just like any resale — at market value. If you are persistent in your quest, you may come across a lender who will offer you some savings on the asking price of the REO. Where you may see additional savings is in the terms you negotiate. Because you are dealing with the lender directly, you can bargain for a lower down payment, no points and no penalties for mortgage prepayment. You could also negotiate a below-market rate.
Finding a Foreclosure
Locating a foreclosure is not always easy; hence the legwork. Properties are often on file with the county clerk, and you may have to page through hundreds of documents to narrow down a home that fits your criteria. Some lenders do advertise foreclosures in the newspaper, but most do not hand out information on a silver platter. With the Internet, there are pay-to-use foreclosure lists that could help you.